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FIRE

The most important number to know if you are on track to FIRE (Financially Independent / Retire Early) is your savings rate. Your savings rate is a calculation of how efficient you are with your money.

If you have a 0% savings rate you are not saving anything so you will always have to work or rely on Social Security / Government assistance to retire.

If you have a 100% savings rate you have no expenses and can retire soon (assuming you will not increase spending in the future).

In theory this sounds like an easy calculation:

Savings = Take Home Pay – Expenses

Let’s take a look at some different ways to calculate savings rates.

1) A lot of people in the FIRE community choose to calculate their before tax savings rate:

This savings rate will not be correct since taxes are not factored in. The other issue is that it does not include 401k contributions. In order to calculate a more realistic savings rate you should include your after tax earnings and your 401k contributions.

2) Here is how to calculate an after tax savings rate which includes 401k contributions:

Expenses: Housing, Loan Payments, Cash Withdrawals, Fees, Bills, etc

Why didn’t I include IRAs and brokerage accounts? It’s not necessary to include these. These are after tax accounts where you make contributions from your take home pay, which is already included.

I also didn’t include 401k matching or pensions even though they are essentially free money. The purpose of this exercise is to calculate how much of your earnings you are saving, not how good your benefits are.

My after tax savings rate comes out to 49.6%. I feel that this is a pretty high savings rate. The average savings rate in the US is only 5.7%. By continuing to keep expenses low and by getting raises at our jobs we should be able to grow our savings rate substantially over time.

Readers, have you calculated your savings rate? Did you use a before tax or after tax calculation?

FIRE is a popular movement in the personal finance community, with millennials expecting to retire from their full time jobs in their 30s or 40s. So one question I asked myself recently was, what is the average age that most people retire in the US? Well, Time Magazine recently published an article that shows the ages when people retire. The following graphic is supplied by LIMRA Secure Retirement Institute.

Results

The results of the analysis makes sense based on what I have observed in real life. I don’t personally know any under age 40 retirees. I also don’t personally know anybody who is over 85 and working. Here are some stats that I found interesting:

The majority of people (51%) retire between the ages of 61 and 65.

91% retire by age 75

2% retire after age 85

Less than 1% of people retire before age 50.

I don’t believe there will be a dramatic change in these numbers even with the FIRE movement. The personal finance community is relatively small and unlikely to move the needle. I’m also not sure if it is a good idea to retire so early since you would be losing out on decades of income and benefits.

The surprising conclusion of the Time article however suggested that people should work even longer than they do now!

To get a picture of how severe the retirement income crisis is—and why more Americans should consider working longer and delaying Social Security—LIMRA looked at total savings. U.S. households own $31 trillion of investable assets. That’s an average of $253,200 per household. But most of that is owned by the wealthy. The median holding is just $17,500 and three in four American households have saved less than $100,000.

I think this is really bad advice. Instead of encouraging good money habits from a young age, Time is basically giving up and suggesting that people work until they are in a nursing home. Here is some better advice to be able to retire before the average ages of 61- 65:

Max out your 401k. Your balance will be over $100k in 6 years without accounting for an employer match or investment returns.

Minimize housing costs

Live close to work

Pay down all high interest rate debt

Cook your own meals

Find an employer that will pay for an advanced degree

Buy quality stuff on sale

Invest in the S&P 500

Workout and eat healthy

Readers, what age do you plan on retiring? What advice do you have for people to be able to retire before 61?

Everyone has a different opinion about how long you should keep your car. I’ve known people who buy a new car every couple years seemingly out of boredom. Others have a set amount of time, like 5 or 10 years until they buy their next car. Finally some people drive their cars into the ground. Let’s see which strategy makes maximum “cents” (see what I did there?).

Depreciating Asset

In case you didn’t know, cars are a depreciating asset which means that they lose money over time. You’ve probably heard that cars lose value when you drive them off the lot. According to Edmunds, a leader in automotive information, a car will lose about 9% of its value as soon as you drive it off the lot. Here is the breakdown of depreciation for each of the first 5 years:

Year 1: 19%

Year 2: 12%

Year 3: 11%

Year 4: 9%

Year 5: 9%

As you can see above, cars start depreciating quickly but the depreciation slows down over time. For these examples I will use the car depreciation calculator at Money-Zine.

New Car Every Two Years

Before I even analyze this scenario I have to mention that this seems really irresponsible unless you are independently wealthy and have money to spend. Lets say a man named Larry decides to buy a $20,000 new car every 2 years. If it loses 31% of its value after 2 years it would be worth $13,800. Maybe Larry justifies his new purchase because he doesn’t have to pay for any maintenance on his cars. He just trades it in and buys a new $20,000 car in a state with a 5% tax rate. After 60 years of driving, Larry would have spent $1,053,284!

New Car Every 5 or 10 Years

Let’s perform the same example for people who purchase cars every 5 or 10 years. For this example we will call them Sara and Fred respectively and let’s also assume that they spend $500 in maintenance costs every year they own their cars. Sara will end up spending $395,190 and Fred will end up spending $184,730 over 60 years of driving.

Drive Cars Into The Ground (Every 20 years)

Finally, lets examine the group of people that decides to drive their cars into the ground and purchase a new car every 20 years. For this example we will increase the maintenance costs per year to $1,000. Emma will be the fictitious character that eschews big, expensive purchases. After 60 years of driving, Emma will have spent $126,584.

Summary

Here is where we will take a look at how much money each of the characters has spent over their lifetime.

Larry: $1,053,284 or $17,555 per year

Sara: $395,190 or $6,587 per year

Fred: $184,730 or $3,079 per year

Emma: $126,584 or $2,110 per year

From these results it is pretty clear that you should try to hold onto your car for as long as possible. Not everyone will want to keep their car for 20 years. Maybe the maintenance expenses start to become unbearable. However, this is the reason to look into reliability when buying a new car. You should be looking to purchase something that has the potential to last 20 years. Note, the previous examples did not factor in the higher cost of insurance for new cars which would have favored holding on for long periods of time.

Readers, do you agree with these examples? How long do you expect to hold on to your car?

In the personal finance community the idea of attaining FIRE (Financially Independent / Retire Early) has gained steam in the past few years and was popularized by Mr. Money Mustache. Check out my FIRE Prowess Score here. To start the path to FIRE you first need to save a considerable amount of your paycheck. If you have a high savings rate you could also become a millionaire! The next step to FIRE is to increase your income. There are several ways to do this, but this post will focus on the two most common. If you are at a full time job that pays overtime should you work extra hours or you should you start a side hustle in your spare time?

Overtime At Full Time Job

People usually decide to work overtime at a full time job either because there aren’t enough hours available to get their work done or they are trying to earn additional income. If you have the choice to work overtime, should you jump at the chance? There are several factors to consider:

If you work overtime you may be increasing your chances at a promotion

Is there a minimum number of hours you have to work to get compensated?

Do you get paid at a higher rate if you work overtime?

Do you get future PTO for extra hours worked?

How many hours of overtime are you allowed to work?

There is an example from Time of a San Francisco Bay Transit Authority (BART) janitor making more than $270,000 in 2015 with $162,050 coming from overtime. While this required him to put in an extreme amount of overtime it shows that there are possibilities for earning extra from your current job. You don’t have to worry about starting something new on the side and dealing with startup costs or tax implications.

Side Hustle

I want to give a shout out to Mrs. Picky Pincher who posted about the FIRE community’s obsession with side hustles. This is a good read on the pros and cons of side hustles.

Some people are unable or unwilling to work overtime at their job. Maybe their current job is only part time so they need to supplement income with an additional income stream. It’s also possible that they do not like their work environment and do not want to spend any additional time at their office. Here are some factors to consider for starting side hustles:

How stressful is it to juggle multiple side hustles?

What are the tax implications?

Is there a conflict of interest with your current employer?

Is there opportunity to earn more than your current job?

What is the cost to entry and the learning curve?

Forbes has an example of a woman working a full time job, earning a 6 figure salary, but starting a coaching business in her spare time. She was able to grow her side business into earning $1M a year. While this example will not happen for most people it shows there is a potential to earn significantly more than your current job.

The other obvious benefit of a side hustle is that it adds income diversification. If you get laid off or you want to quit your job you have other options available immediately. The downsides are that side hustles do not usually come with benefits like PTO, sick time, 401k matching, health care, life insurance, etc. If you rely solely on side hustles for employment then you may have to earn considerably more than a full time job to match the benefits.

Readers, which option do you believe is better for FIRE? Should you work overtime or start side hustles?

Paths To Becoming A Millionaire

Everyone dreams about becoming a millionaire throughout their lives. What are the different paths of getting to one million dollars?

Some people like to play the lottery or go to a casino for an infinitesimal chance at winning it big.

Others are entrepreneurs and start a business hoping to eventually roll in the dough.

For most of us the best chance we have to become millionaires is through our normal 9 to 5 jobs. We have to save a large percentage of our paycheck and then invest it in something ie. stocks, real estate, currency, etc. How long does it take to become a millionaire?

In the following examples I will compare saving with investing in an S&P 500 Index Fund (which has a 10% historical average return including dividends). Remember, past performance does not guarantee future results.

Saving at Different Income Levels

I will present 3 varying income levels to see how long it takes to get to $1M by only saving without gaining any interest.

$60,000 Taxable Gross Annual Income

Start saving 20% of income ($12,000) per year. You will reach $1M after 84 years.

$100,000 Taxable Gross Annual Income

Start saving 40% of income ($40,000) per year. You will reach $1M after 25 years.

$250,000 Taxable Gross Annual Income

Start saving 60% of income ($150,000) per year. You will reach $1M after 7 years.

Investing at Different Income Levels

Here I will present the same income levels but investing the money instead of saving to see how long it takes to get to $1M. I am assuming a 10% rate of return based on history of the S&P 500.

Note that having a large income alone does not guarantee that you will be rich or even reach one million dollars. It is important to live within your means in order to grow your nest egg.

$60,000 Taxable Gross Annual Income

Start investing 20% of income ($12,000) per year. You will reach $1M after only 23 years.

$100,000 Taxable Gross Annual Income

Start investing 40% of income ($40,000) per year. You will reach $1M after only 13 years.

$250,000 Taxable Gross Annual Income

Start investing 60% of income ($150,000) per year. You will reach $1M after only 5 years.

Results

The previous three examples show that getting to $1M is not a get rich quick scheme. It takes deliberate saving, investing, and budgeting. The earlier you start, the greater your chances for success due to the magic of compound interest (see above image). If you have a salary of $60,000 and save 20% it will take you 84 years of saving or 23 years of investing to reach millionaire status. Which one would you pick?

The time to get to $1M will decrease if you contribute any increases in income due to promotions. You could also decide to earn extra money by starting a side hustle to get there quicker.

Bottom Line

Getting to one million dollars should not be viewed as an impossible feat. If you start planning early enough you can reach your goals. If you start late you need to save extra in order to have a chance of catching up.

Everyone can benefit from optimizing their lives in order to save an extreme amount. This will drastically reduce the time it takes to get to $1M.